• Professor

How to save, spend & invest money: Personal Finance Basics

“When a fellow says it ain't the money but the principle of the thing, it's the money.” - Artemus Ward

There's no denying the fact that although money can't solve all your problems, it can definitely solve all your financial problems.

Broadly speaking, there are three things that you can do with money:

  1. Spend

  2. Save

  3. Invest

The concept of 'financial independence' revolves around managing these 3 aspects of money. Once you master each of them, at least your life decisions won't be affected or constrained by your financial worries.


No one needs a lesson to be taught on how to spend money. Give a man/woman all the money in the world, he/she would still have something they can't buy. The lesson that we really need to learn is how to spend our hard-earned money the right way...you savvy?

Let's ponder where do we tend to spend money usually:

- sipping coffee at Starbucks

- movies

- travel,

- branded apparel

- latest gadgets

and the list goes on.

The 50/30/20 rule suggests that you spend 50% of your income for your needs, 30% for your wants, and 20% to keep as savings. A need is something needed to survive while a want is something that people desire to have, that they may, or may not, be able to obtain.

Expenses like rent or utility bills are incurred because of necessity and have to be made irrespective of income. The lesson is required for managing the 'wants' and not the 'needs'.

So how do you resist your temptations and keep a check on your spending?

“The person who doesn't know where his next dollar is coming from usually doesn't know where his last dollar went.” - Unknown

You read it right. You ought to know where did the last dollar go into? The simple thing you can do is to prepare a budget i.e. maintain an excel sheet or journal. I know its cliche to give this basic advice but you know what....it really works. It helps you plan which is very liberating and allows you to make intelligent choices.

  • Write down your aspirations(desires) to quantify your periodic expenses

  • Note down your income during that period

  • Match the 'expenses' against 'income'

  • If expenditure exceeds income (obviously it does), prioritize some of your expenses

  • Try to fill the gap with some sort of additional cash inflow

The act of spending extravagantly is termed as 'splurge'. All we need to do is control the 'urge' to 'splurge'. These extravagant aspirations lead to living beyond budget further resulting in Credit Card Debt. Promise yourself not to get into debt unless it is a 'do or die' situation.

In simple words: Splurge! but not too much & avoid debt.

“Never spend your money before you have earned it.” - Thomas Jefferson


Yes, saving is an art indeed. One can learn and master an art only by practicing it and so is the case with savings. Technically,

Savings = Income - Expenses

It means saving is what is left after spending. But this definition does not support financial planning. Saving should be pre-determined and expenses are ought to be made after providing for the compulsory saving.

“A simple fact that is hard to learn is that the time to save money is when you have some.” - Joe Moore

  • Start saving from day 1, the day you land a job.

  • Develop the habit of compulsory saving.

  • Your savings should grow with your income.

  • The most critical hurdle is to reach a savings goal of 100k - once you make it, the next 100k comes relatively faster. Similarly the 1st million and so on.

It is suggested that you save 20-30% of your income which is to be kept in a bank account or some liquid debt fund. Banks & debt-funds are very liquid (i.e. cash can be withdrawn very quickly in around 1-2 days).


What is investing and how is it different from saving?

Savings are nothing but the leftover portion of your income. Investing is when you put your money work for you. When your money is made to grow by itself, this is investing.

Why saving is not enough? Why is investing needed?

When you do investments you beat inflation. Capital appreciates faster and it leads to wealth creation. If you save only and do not invest, your money is losing its value over time because the purchasing power of money reduces due to inflation.

The first step is to get you and your family a term-insurance as well as health insurance. The early you get insured, the better. The need of insurance cannot be more emphasized in the corona-struck world.

Although I have covered insurance under the head 'Investing', don't confuse insurance with investments. The point is that before you put your hands on some risky investments, get your health & family out of risk.

Often people have this tendency to treat endowment insurance policies [LIC] as investments. Clearly, they are not. Insurance may provide tax benefits but doesn't give you meaningful returns.

When it comes to investing, what you have to have is a clear set of goals. Goals can be short, medium, or long term.

- Short-term goals are like: a holiday or a celebration

- Medium-term: house property

- Long-term: retirement

Based on the term of your goals, your investment plan has to be curated.

Basic things to know while investing:

  • Start with equities first. If you don't have time for analyzing stocks, start with Mutual Fund SIPs.

  • Fixed Deposit or Recurring Deposit offers returns just a little over the inflation rate, hence SIPs in debt funds are a better option.

  • Go for ELSS investments instead of PPF to meet the goal of tax savings.

  • Invest greater amounts initially when your needs are low.

Note: The proportion of investment in equity, debt, or other asset classes is a subjective matter. Your age, risk appetite, immediate goals and other circumstances need to be considered before making an investment decision. Please do consult your financial advisor for investments. Self-medication sometimes proves to be fatal.


By now, you should have got some idea about how we interact with money, the ultimate uses money can be put to, and some basic finance concepts. To sum up:

  1. Know your needs and wants

  2. Make a budget to keep a check on spending

  3. Develop a habit of compulsory saving

  4. Avoid debt

  5. Invest to get returns above inflation

In this blog, more emphasis has been laid on spending and savings habits and a little on 'Investing' keeping in mind new learners of finance. Investing, types of asset classes, risks involved in each asset class, stock analysis, and other related terminology will be covered in detail in upcoming blogs.

In the end “The real measure of your wealth is how much you’d be worth if you lost all your money.”

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